Businesses often keep books, called journals, in which the bookkeeper records transactions which take place over the course of an accounting period. In an exchange, the company trades one asset for another. Usually the assets are of a similar nature (a car for a car), but at times they are dissimilar (a car for a plane). If there is a loss, the bookkeeper records the exchange in the same manner. However, if there is a gain, the transaction is recorded differently.
Things You'll Need
- Accounting software
- Book value of asset
- Receipt of exchange
Recording a Gain or Loss
Determine the book value of the asset by taking the cost of the asset and subtracting the amount of accumulated depreciation recorded since the purchase date. Accumulated depreciation can be found in previous journal entries related the same asset or in aggregate on the balance sheet.
Determine the gain or loss on the exchange by subtracting any amount that the company receives for trading in the asset. A positive number remaining represents a loss, whereas a negative number represents a gain.
Add together the cost of the new asset and the trade-in value for the old asset. This is the cost of the new asset and the preparer uses it in the journal entry.
Record the cost of the new asset, the total accumulated depreciation on the old asset and a loss if taken as debits. Debits are in the left column in a journal entry.
Record the value of the old asset, any cash exchanged and any gain on the exchange of dissimilar assets as credits. Credits are recorded on the right side of a journal entry.
Add together the book value of the old asset and any cash that the business pays if the assets are similar. This represents the cost of the new asset. It is the only difference when recording an exchange of similar assets in which there is a gain. The gain is deferred until an exchange or sale of the new asset occurs.